Global saving glut

Global saving glut (also global savings glut) is a term coined by Ben Bernanke in 2005. The term describes a situation in which there are worldwide too many savings with respect to investment opportunities. On a national level a saving glut creates the tendency for savings to finance current account deficits (of other countries) instead of investments. This can be observed, according to Bernanke (2005), in both developing and industrial countries. The most important receiving country of these export surpluses financed by excess savings, is the United States, which runs a current account deficit.

Other economists, such as John B. Taylor, reject the claim that there was a global saving glut in the early 2000s, arguing that while there were global imbalances due to the US saving less, the world as a whole was saving less than in previous decades.

Niall Ferguson in The Ascent of Money, published in 2008, examines the long history of money, credit, and banking. In it he predicts a financial crisis as a result of the world economy and in particular the United States using too much credit. Specifically he cites the China–America dynamic which he refers to as Chimerica where an Asian "savings glut" helped create the subprime mortgage crisis with an influx of easy money.

Causes of the saving glut

Bernanke mentions several causes for the world saving glut.

In advanced countries

• Aging populations: These populations must make provision for an impending increase in the number of retirees relative to the number of workers.

• “Dearth of domestic investment opportunities”, due to
  • slowly growing or declining workforces,
  • high capital-labor ratios, which leads to low returns on domestic investment.

As a result the mature industrial economies seek to run current account surpluses and thus to lend abroad.

Developing countries

• "War chests" of foreign reserves: To avoid the consequences of financial crises many developing countries are building up large quantities of foreign-exchange reserves. These foreign reserves can be used as a buffer against potential capital outflows during financial crises.

• Promoting export-led growth by preventing exchange-rate appreciation (sometimes called Bretton Woods II).

• Rise in oil prices: This leads to rising current account surpluses of oil exporting countries in the Middle East, in Russia, Nigeria, and Venezuela.

The US as importing country

According to Bernanke the US was attractive for foreign investors because of new technologies and rising productivity. Capital flowing into the United States increased the value of the dollar making the imports of the US cheap (in terms of dollars) and exports expensive (in terms of foreign currencies), creating a rising US current account deficit.

Consequences of the saving glut

• Rising global imbalances with respect to international current account balances
• Developing countries becoming net lenders on capital markets, while industrialized countries such as the United States became net borrowers
• Low rates of interest: Desired saving tending to be larger than desired investment leads to a fall in the interest rate.
• Rising asset prices, which result from low interest rates.

As Alan Greenspan put it:

Whether it was a glut of excess intended saving, or a shortfall of investment intentions, the result was the same: a fall in global real long-term interest rates and their associated capitalization rates. Asset prices, particularly house prices, in nearly two dozen countries accordingly moved dramatically higher. U.S. house price gains were high by historical standards but no more than average compared to other countries.

Critique

This view of a world wide saving glut responsible for low levels of interest rates is disputed by neoclassical economists like the German economist Hans-Werner Sinn, who claims, that it was the monetary policy of the US Federal Reserve in the 1990s which kept interest rates too low for too long. In addition, the policy of the US government encouraged private debt to promote private consumption. This led to a lack of savings in the US which was then provided from foreign countries on a basis which was not sustainable. Carl Christian von Weizsäcker follows Ben Bernanke claiming that aging populations which save more than can be profitably invested lead to a saving glut and negative equilibrium rates of interest which makes public deficits necessary to fill the gap between excess private savings and private investment.

From the perspective of monetary economics, the savings glut idea has been criticized as conceptually flawed, ignoring the role of credit creation, and related unsustainable asset price booms. Further, the composition of cross-border financing flows cannot be determined just from the net capital flows, and analysis on this basis yields flawed conclusions.

Rejection

Economist John B. Taylor rejects the claim that there was a global saving glut in the early 2000s, writing:

The main problem with this explanation is that there is no actual evidence of a global saving glut. On the contrary ... there seems to have been a saving shortage. ... [T]he global saving rate – world saving as a fraction of world GDP – was low in the 2002–4 period, especially when compared with the 1970s and 1980s.

He continues that while there were global imbalances – the US had a saving gap, while the rest of the world had a saving glut – these canceled out, and there was no net global saving glut:

To be sure, there was a gap of saving over investment in the world outside the United States during 2002–4, which may be the source of the term saving glut. But the United States was saving less than it was investing during this period; it was running a current account deficit which implies that saving was less than investment. Thus the positive saving gap outside the United States was offset by an equal sized negative saving gap in the United States. No extra impact on world interest rates would be expected. As implied by simple global accounting, there is no global gap between saving and investment.

However, the global gross savings rate (not necessarily the net savings rate) during the 2000s was slightly higher than savings rate in the 80s or 90s according to IMF data.

References

• Taylor, John B. (August 2007), Housing and Monetary Policy, Kansas City Federal Reserve Bank Economic Symposium. Jackson Hole, WY. 
• Taylor, John B. (2009-02-25). Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (1st ed.). Hoover Institution Press. ISBN 0-8179-4971-2. 

External links

• Governor Ben S. Bernanke: The Global Saving Glut and the U.S. Current Account Deficit. March 10, 2005
• Chairman Ben S. Bernanke: Global Imbalances: Recent Developments and Prospects At the Bundesbank Lecture, Berlin, Germany. September 11, 2007.
• Thierry Bracke and Michael Fidora: Global liquidity glut or global savings glut? European Central Bank Working Paper Series No 911/June 2008
• Niall Ferguson and Moritz Schularick (2007) on "Chimerica"